SEC proposes pay disclosures comparing CEOs to workers

Meant to help investors identify if comp models too top-heavy in U.S.

By Sarah N. Lynch

09/18/2013|hrreporter.com|Last Updated: 09/18/2013

WASHINGTON (Reuters) — U.S. corporations will need to disclose how the paycheques of their CEOs compare with those of their workers under a new proposal released on Wednesday by a sharply divided U.S. Securities and Exchange Commission.

With the CEOs of many U.S. companies earning hundreds of times more than their workers, unions and labor advocates are championing the SEC's CEO pay-ratio rule. They say disclosures would help investors identify whether a company's compensation model is too top-heavy.

But business groups such as the U.S. Chamber of Commerce and the Center on Executive Compensation oppose the measure, saying the data is costly to compile and would not be useful for investors. These critics say investors have little appetite for such a measure, citing failed efforts by shareholder activists to adopt resolutions requiring CEO pay ratio disclosures.

Among the companies with the highest-paid CEOs are Oracle, Walt Disney, Viacom and Starbucks, whose CEOs in 2012 earned between US$28 million and US$96 million, according to the compensation data provider Equilar.

Critics of the rule have urged the SEC to scale it back, possibly allowing companies with global offices to compile median pay of workers using only data from U.S.-based employees.

Seeking to strike a balance between opposing viewpoints, the SEC said it would still require companies to include compensation data for all workers, including those employed overseas or by subsidiaries, but would give companies more flexibility in how they calculate the median.

They could, for instance, use a statistical sampling — an option that the SEC's chief economist Craig Lewis said could help reduce compliance costs.

SEC Chair Mary Jo White said the deep divisions over how to implement this rule were evident in the more than 20,000 comment letters the agency had received on the subject.

"The staff has drafted and recommended a proposal that would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate," White said of the plan.

But those efforts did not satisfy everyone at the SEC.

The SEC's newest Republican commissioner Michael Piwowar unleashed a string of complaints before the vote, saying the SEC has no business even considering the rule.

"Proponents have acknowledged the sole objective of the pay ratio is to shame CEOs, but the shame from this rule should not be put on CEOS — it should be put on the five of us," he said. "Shame on us for putting special interests ahead of investors."

But SEC Democratic commissioner Luis Aguilar, who supports the measure, said: "As owners of public companies, shareholders have the right to know whether CEO pay multiples reflect CEO performance."

He added that "Pay ratio disclosure can provide a valuable new perspective for executive compensation decisions."

Based on an analysis of 2012 data, Equilar found that the highest-paid CEO was Oracle's Lawrence Ellison with US$96.1 million.

The CEO ratio pay proposal is one of two major outstanding regulations mandated by the 2010 Dodd-Frank Wall Street reform law that the SEC tackled at Wednesday's public meeting.

The unveiling of the CEO pay ratio rule comes five years after the collapse of investment banking giant Lehman Brothers.

The 2007-09 financial crisis prompted public outrage over high CEO pay at Wall Street firms bailed out by taxpayers. Congress passed the Dodd-Frank law in response.

A new report by the left-leaning Institute for Policy Studies, which analyzed data on the highest-earning CEOs over a 20-year period, found that those whose companies collapsed or received government bailouts have held 112 of the top 500 slots.

The report said the pay gap between CEOS and the average American worker has grown from 195-1 in 1993 to 354-1 in 2012.

"The simple fact is that large pay disparities between CEOs and their employees affect a company's performance," Trumka said. "When the CEO receives the lion's share of compensation, employee productivity, morale and loyalty suffer."

Timothy Bartl, president of the Center on Executive Compensation, said: "The Center strongly opposes the pay ratio requirement in the Dodd-Frank Act and will continue to work for its repeal in Congress."